The cat is out of the dime bag—the cannabis market is going mainstream with commercial investors and extensive distribution networks getting involved. Due to the known health benefits, revenues, and profits, we can only expect to see growth in this fledgling sector. With President Joe Biden taking office and New York likely to roll out recreational cannabis this year, it's a great time to get into the cannabis game.
But before you do, check out my top five tips for investing in cannabis:
Research, Research, Research
Every great investor understands you should never go in without a plan, especially when it comes to new industries. When you consider all the variables involved in cannabis, having a clear plan can mitigate financial disaster.
If you are looking to invest in individual stocks, make sure you look at the revenue growth, profitability, forecasting for future growth, any disruptive technology, and most importantly, the track record and experience of the management team. These are all critical factors in successful investments.
Let MedMen be the cautionary example of why you need to research before you plunk down some coin. This company was shockingly inexperienced in terms of cultivation and sourcing, and when investors started asking questions, MedMen’s stock plummeted 3200%!
Understanding the Business
It is crucial to understand the difference between recreational and medicinal weed in business and how they serve their segments. Once you know the limitations and opportunities of both these classifications, you should examine the three types of cannabis businesses you will find on the market:
Dispensaries and Growers: These businesses cultivate and process cannabis and distribute it to retailers or have retail operations of their own. As is the case with Multi-State Operators (MSOs) like Curaleaf (CURLF), they are involved in all aspects of the plant from seed to store.
Service and Goods Providers: Ancillary businesses that support the cannabis industry are not subject to the same regulations and taxes as MSOs, retailers, and growers. They provide supplies, branding/marketing, and management services. If you are risk-averse, you may want to go down this path; after all, GrowGeneration Corp. (GRWG: US), a gardening supply chain in New Jersey, was named by Bloomberg as 2020's top stock pick in the sector.
Biotech: Companies like Cannabics Pharmaceuticals, AbbVie Pharmaceuticals, and (my company) BIOMEDICAN develop cannabinoids like THC, CBD, and CBG through proprietary processes without touching the plant. These companies generally use less overall resources and tend to work well as vendors to both recreational and medical MJ companies.
ETF for Cannabis vs. Individual Stocks
There are many ways to invest in cannabis, either through an ETF or individual stocks. If you are a novice to this market, you will want to avoid the common mistakes retail investors make, like buying on hype.
Beginners seem to do better investing in an ETF (exchange-traded fund). An ETF fund is a type of investment fund and exchange-traded product, i.e., it is traded on stock exchanges. ETFs are similar in many ways to mutual funds, except that ETFs are bought and sold throughout the day on stock exchanges, while mutual funds are bought and sold based on their price at the day's end.
Be sure to check the fees the ETF charges, past performance, and the types of investments they are making. Some ETFs invest only in the largest companies, while others, which are much more risky, tend to invest in smaller companies that may produce higher returns but also may burn out. Here is a link to the top ten ETFs in the cannabis space.
Look Ahead (Not Behind) for the Next Big Thing in Cannabis
Technology will ultimately take over these markets and be the most significant driving force moving forward. Like most markets, innovation will disrupt the cannabis market and make the products better, safer, and cheaper.
Although many investors know about THC and CBD, there are over 200 other cannabinoids. If a company isn't introducing new methodologies, patents, streamlining costs, and processes, you can't expect those stocks to deliver five years from now. Look for the forward-thinking ideas and proven outcomes already.
Assessing Your Sensitivity to Risk and the Biden Administration
Lastly, before you dive in, I must warn you that cannabis stocks are highly volatile and risky. Some of the reasons on the business side are inexperience, supply/demand issues, and lack of funding – not to mention cannabis is still illegal at the federal level. Due to a lack of regulation, cannabis growers and retailers do not have access to banks.
Now you may be asking yourself, “Do I have to worry about the Biden administration?” The short answer is no. The domino effect of legalizing cannabis is already in motion. Sixteen states now have legalized cannabis, with the rest soon to follow, and this is because states are desperately looking for new sources of revenue to fill in the gaps COVID-19 has created. Additionally, many states are looking for ways to unburden their legal and prison systems, and decriminalizing cannabis proves to be a clear path to that goal.
The Biden administration will be much more accommodating and ultimately will legalize cannabis on a federal level, although these changes won't happen overnight. All of this means significantly more investment into the cannabis market, so these stocks will perform exceptionally well.
Maxim Mikheev is CEO and Founder of BIOMEDICAN, a biotech startup designing patented low-cost methods of growing high-value compounds at scale with proprietary yeasts.